IMPORTANCE OF SMES IN EMPLOYMENT GENERATION

TARIQ AHMED SAEEDI - tariqsaeedi@hotmail.com
Apr 27 - May 10, 2009

In economic growth, small and medium enterprises can play a vital role. The development of SME sector is important for a country that has a large work force dependent on this sector to earn livelihoods. Small-scale operation of these enterprises differentiates them from large-scale companies. Normally, this sector comprises of companies that have up to 99 employees. It is a proven fact from different estimates that SMEs employ not below 90 percent of total employees in private sector in Pakistan. According to SME policy 2007, they constitute 78% of total non-agriculture workforce, over 30% of GDP, 25% of exports of manufactured goods, and 35% of valued added manufacturing. There are many small sized companies in the country with having not been included in the documented economy despite of their considerable shares in gross national products. Reasons behind their covert operations could be several, but the most understandable one is their exuberated willingness to avoid government levies and complicated tax structure.

Since private sector is the key to develop and foster small and medium-seized businesses that in turn guarantee economic weal through consistent employment creation, it remains a matter of concern in all labour-intensive economies world over that how private initiatives in small and medium industrial development can be promoted and kept intact to contribute in mainstream economy.

Certainly, without government support and resources, this development could never be sustainable. Chinese government has waded through the similar predicament and somehow identified the solutions of how to cash in on private capital for improving small and medium enterprises. It is not that it has completely exploited the underlying potential of its SMEs, in fact, Chinese government is still struggling to persuade private sector for development of SMEs. Even after the flexibility in social governance model that for long never permitted non-government investment in economy, the country still finds hard to restore confidence of the private sector.

Corruption is considered as a chief obstacle in SMEs growth. A Chinese Public Daily said corruption, lack of access to finance, and exclusion from formal economy are real impediments hindering growth of SMEs in the country. In spite of these, in percentage terms share of the sector in nation's economy is far better than that of it in Pakistan. "China's SME business would reach one trillion US dollars in 2009," a Chinese newspaper cited ministry of industry as saying. Chinese and foreign experts said SMEs are responsible for 60% of country's industrial outputs and employ 75% of the workforce in China's cities and towns, it said.

The situation in Pakistan is no different from neighbouring economic giant; nonetheless, monetarily the Pakistan's small and medium sector has not gained such a gigantic size what China has. Assuming that successive governments have not focussed on promotion of small and medium sector in the country would be baseless since famous 80s and 90s self-employment and entrepreneurship schemes started to shore up small businesses in the country.

Establishment of specialized bank: SME bank was a practical effort towards capitalization of potential of SMEs. However, these and following schemes failed to produce significant results as they needlessly concentrated on single aspect of sector development of access to finance and thereby ignoring other fundamentals, according to analysts. In past, development of SMEs was in harmoniously conditioned with expansion of finance. Although, that deemed good, what happened in the effect was swelling of bed debts due to unsystematic disbursement of loans. Flows of government financial supports did not benefit deserving target group. Concurrently, lack of coordination or communication gap between government institutions and public are making distribution of resources aimless. There are numbers of small enterprises that are operating on self-help basis and without government support. For example, they give preference to informal sources over banks and other financial institutions to meet financial needs.

The importance of small and medium enterprises in poverty alleviation and employment generation has increased at this time of economic slowdown. The SME vision-2015, though, needs to be revised, envisaged increase of SMEs share in manufacturing value added to 40%. Prepared by small and medium enterprise development authority, it envisaged numbers of new enterprises by graduates increased by six percent. Last government chalked out the vision and the policy, underlining the essentialities of making special SMEs development plan. Federal cabinet did not approve the policy due to perhaps political instability.

Seemingly, the policy set overambitious definition of SMEs, neglecting the realistic structure, and striking out majority of small businesses from the sector. For instance, it defined SME as a company with up to 250 employs, Rs25mn paid-up capital, and annual sales of up to Rs250mn. This description would lead to encompass many out-of-the-way businesses.

Government should ensure that available resources be used for the advancement of entrepreneurship and small and medium enterprises. This can help government to overcome challenges of rising unemployment, decreasing exports, and other economic setbacks. Apparently, this government has not included SME sector in its economic development plan as, so far, it did not announce any relevant policy. Trade policy 2007-08 did not take up SMEs.

Capital requirement of small and medium enterprises is not as high as of large-scale companies, and financial institutions are eagerly coming towards financing SMEs. Therefore, financing will not remain an issue. The FIs-private sector connection is to be strengthened. Government should devise regulatory framework and tax reforms for small and medium sized enterprises. Specifically, one or two taxes should be in place instead of score of levies at every threshold to encourage disclosure of genuine outputs.